Larger occupational pension schemes and master trusts could be compelled to improve reporting over climate change risks, under proposals published by the Department of Work and Pensions today.
In its consultation paper – Taking action on climate risk: improving governance and reporting – the DWP proposes to mandate climate governance and risk reporting for all master trusts and schemes with with assets of more than £1bn.
From 2022 this would initially apply to schemes with assets of £5bn or more, and would be extended to all schemes with assets of at least £1bn the following year.
This reporting would be in line with the international industry-led Task Force on Climate-related Financial Disclosure (TCFD). Those failing to provide this information could face fines from the Pensions Regulator.
The proposals, which apply to both DB and DC schemes, would require trustees to publish an annual report, setting outs the potential risk to members’ savings from climate change and the switch to a net zero emission economy
This would also include reporting on greenhouse gas emissions of their investment portfolios.
The DWP said this marks one of the most significant steps to date in the UK’s progress to tackling climate change, with pension schemes helping to drive change to a sustainable, low carbon economy.
This consultation document builds on last year’s Green Finance Strategy, which set an expectation that disclosures would be made in line with TCFD recommendations by large asset owners by 2022.
The DWP has made it clear that it wants to ensure trustees consider climate change as a financially material risk, as well as a potential investment opportunity, for pension schemes. It also wants to accelerate pensions schemes’ governance considerations and disclosure on sustainability.
The DWP says these proposals help ensure trustees have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities, and to disclose these via an annual TCFD report.
However, while this proposed new regulation seek to improve governance standards, the DWP said it did not seek to direct the trustees of pension schemes in their investment decisions.
Pinsent Masons head of pensions and long-term savings Carolyn Saunders says: “Whilst most trustees accept the importance of managing climate risks and opportunities, many have struggled with understanding how best to do this.
“The detailed regulations and statutory guidance being proposed will help the trustees to whom they apply navigate this difficult area by providing real focus and support that will empower them to drive the development of the data and tools needed for effective decision-making. Trustees can take confidence from the strong message that they should be addressing climate risk, even though climate risk analysis is not a perfect science.
“In addition, the promise of a future consultation on Paris-alignment reporting and measuring the warming potential of a scheme’s portfolio raises the genuinely exciting prospect of identifying an easily-understood and consistent measure which will drive best-practice.”